NEEDHAM GROWTH FUND
In sloppy to bearish markets, where stocks are up one day and down the next, a little bit of hedging and selling short can make a big difference on a fund's performance. Take the Needham Growth Fund, for instance. Given the chance, it has the ability to really shine when the market isn't.
If you've always thought that investment strategies such as buying or selling put and call options was best left in the hands of professionals, the Needham Growth Fund, (800-625-707), 1is worth a look. The fund began in 1996, and since its inception through Dec. 31, 2000, has racked up an average annual total history of 32.27 percent. Year-to-date, through Feb. 14, the fund is up 17.5 percent.
What makes this fund really tick is its portfolio manager, Peter Trapp.Although he created the fund, he didn't take over managing it until January of 1998. Since his arrival at the helm, the fund has become more tax-efficient, turnover isn't as high as it once was and its expenses have fallen.
Trapp likes to keep about 100 stocks in the portfolio with the top ten holdings making up 21.25 percent of the portfolio as of Dec. 31. The fund is tech heavy keeping between 50 to 80 percent of its assets invested there. What follows is more about the fund along with some in's and out's of Trapp's investment strategies:
Q: Ideally, you like to invest in growth companies that are having a hard time?
Trapp: Our discipline is called growth at a reasonable price, garp. So what we'll do is sit with a big slug of cash and then look for companies that have a p/e multiple that's about half the three-year growth rate and in the tech area that's not always easy. So, what you have to do is sit patiently, visit a lot of companies and get comfortable with them. Then, when something happens that causes one of these stocks to trade down significantly, we're in a position to move quickly.
Q: Could you give me an example of a company in which that happened.
Trapp: Artesyn Technology would be a good example.
Artesyn missed their numbers, they pre-announced weak numbers and the stock got cut in half. I already owned the stock, the stock had gone up a lot, and I had hedged my position because I thought the stock was ahead of itself. So, when the stock went down about 50 percent, I took off my hedge and doubled up on my position.
Q: About 25 percent of the fund is devoted to short selling?
Trapp: Yes. We use a lot of index and equity options in order to hedge our positions. One reason we do this is for tax reasons for our shareholders and to keep their capital gains consequences taxed at a lower rate. So, if a stock runs up a lot and we are not long-term (held the stock for a year or more), what we'll probably do is what's called a "cashless collar".
How that works is we will sell a call and with the proceeds that we get from selling the call, we buy a put. So, if the stock goes up, the stock will eventually get taken away from me. But, if it blows up ( goes down), then what will happen is that the call will expire worthless and the put will be worth whatever the stocks has fallen to.
Q: What if the stock is going up and you don't want the stock taken from you?
Trapp: Then I'm just going to buy back the call. I might lose a little bit of money doing that, but I'm not going to lose a lot and I'm not going to lose the stock.
Q: Are current market conditions good for you and the management of this fund?
Trapp: I think the whole market is in a funk right now because we're trying to figure out whether in fact we are having an inventory correction or whether we are in a recession. But for me this is a great environment because it is a stock pickers market.
Q: Does the ability for you to sell short give you a performance leg-up?
Trapp: Oh, it's huge because I am able to express any negative feelings that I might have about a group of stocks or an area of the market that I think is overvalued by selling stocks short. I might find some stocks that I think are very cheap, which I want to buy, and others that are very expensive which I will short. So I'm long a cheap stock and short an expensive one.
Q: Is this fund riskier because of these investment strategies?
Trapp: No. The idea is to reduce the risk.
What you'll find is that in a melt-up market, meaning when the market goes up a lot, we will underperform against the funds that are long-only the stocks in their portfolios. But in a market that's transitional or down, we can outperform because of our shorts and our hedges. So you'll find this is the ideal kind of market for us.
NEEDHAM GROWTH FUND:
|TOP HOLDINGS||As of Dec. 31, 2000, the fundžs top five holders were Thermo Electron Corp.; McKesson HBOC, Inc., Park Electrochemical; Artesyn Technologies; and American Eagle Outfitters.|
|PERFORMANCE||In 2000, it was up 7. 4 percent; in 1999, 79.7 percent; and in 1998 ahead 19.9 percent. |
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